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Buying Houses

  
  

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Smoothly
22:13 / 06.02.06
I rent my flat. People are constantly telling me I am throwing money away and that I should buy one instead. The way they talk about it, it sounds like free money. Now, I don't know much about economics, but intuition tells me that if property was certain to go up in value, banks wouldn't give people mortgages, they'd just buy houses. But then I don't really understand investments either.

So, for example, people advise me that I should buy somewhere in an 'up and coming' area in order to make the most money. But if I believe a certain area to be up and coming, I assume other people will think so too, and this fact will already reflected in house prices. So, unless I know something that no (or few) other people know, why does it matter?

Also, doesn't the average mortgage demand that you pay back two or three times the amount you borrow? But if I continued renting, couldn't I just save the money that I would otherwise pay my mortgage lender in interest, and, I dunno, break even? Does anyone know how the amount of money a person would throw away on rent in a lifetime compares with the amount of money one would throw away in interest if they were to borrow the sale value of the same property?

And for those of you who aren't independent financial advisors (or those who are, but don't feel like dispensing free advice to strangers on the internet), I'd be interested to hear about how you decided whether to buy or rent.
 
 
Mon Oncle Ignatius
22:23 / 06.02.06
Gah. Rent. The owners have decided to sell. So we're out of here against our will in April, and more than a bit peeved as a result.

The big problem is always going to be getting sufficient funds together to even get a mortgage in the first place.

It's an intriguing point about breaking even in the long term though, and one I hadn't really thought about before.
 
 
Mon Oncle Ignatius
22:25 / 06.02.06
Oh yes:

I'd be interested to hear about how you decided whether to buy or rent.

It wasn't really a decision, more a continuing habit caused by circumstance.
 
 
Whisky Priestess
22:37 / 06.02.06
Um ... isn't the point of mortgages that, at the end of it all, even if you've spent a bit more on the mortgage than you would have on the rent of the same house over an equivalent time period, you are left owning the house rather than fuck all?
 
 
Smoothly
22:57 / 06.02.06
But if you rent, and save the money that you would have spent on interest (ie. price of a house x 2) you would end up with no house, but the price of a house x 2 in cash. If you see what I mean.
 
 
Smoothly
23:00 / 06.02.06
I could be completely wrong about the cost of mortgages though. I'm not sure where I got the 2 or 3 times the price of the house figure from, to be honest. I'm hoping people will straighten me out on this stuff.
 
 
Mon Oncle Ignatius
23:09 / 06.02.06
Could you have been thinking of the rough estimate of how much of a mortgage you can be lent being based on 2-3x your annual income?
 
 
Mourne Kransky
23:10 / 06.02.06
One thing to bear in mind, Smoothly, is that when the mortgage is finally paid off, after twenty or twenty five years, the property will probably be worth ten times what was paid for it.
 
 
Smoothly
23:17 / 06.02.06
Then it seems like a no brainer. Which makes me wonder, why do banks give mortgages rather than just buy the houses, hang on to them and sell them? Seems uncharacteristically generous of them.
Isn't there a chance that the house will be worth less than you paid for it, 'in real terms'? I just can't believe it's free money somehow.
 
 
Cailín
02:30 / 07.02.06
I don't think banks want to be landlords. So they don't buy houses. The other thing to remember about banks and mortgages: it is a win-win situation for the bank. If you pay your mortgage, they get the overall interest, which they in turn can invest and turn into a larger profit. If you don't pay your mortgage, they get your house. See? Win-win. Banks also labour under the "evil empire" syndrome: they have a responsibility to show a decent profit to their shareholders each year, and I don't think that can include the appreciation in value of insecure non-liquid assets (i.e. houses).
And the argument still stands: every month I pay rent that is comparable to a mortgage payment for a condo comparable to my apartment. In the end, I have fuck-all. If I were paying a mortgage, I would own my home, and be able to sell it for more than I paid, thus turning a profit that would probably more than make up for the interest paid. The up-and-coming area thing actually does hold water, as well. If property values are on the rise in an area, odds are they will continue to rise, and then eventually flatten out - it's a trackable trend, so you can avoid buying in an area where the market has cooled. For those who can afford the down payment and don't tend to move much (you can lose your shirt in fees if you're constantly changing properties), owning really does seem to make more sense long-term than renting. But that's just me - I rent because I can't afford to buy.
 
 
Spaniel
07:38 / 07.02.06
I don't know where you live, Smoothly, but if it's anything like where I live, I'd imagine you have little choice but to carry on renting anyway. The fees alone are enough to crush the average wallet (survey+stamp duty+lenders fee+searches+solicitor's fee=thousands), and that's before you even think about the deposit - likely to be at least £13,000 around these parts for a notsogreat one bed flat. And then there's the problem of finding a mortgage to suit your pocket. Okay, so Northern Rock are currently offering to lend up to 6x your salary, but, let's face it, that's just silly - you ain't never going to pay that off. Shit, if you're relying on one wage (down here) that's unlikely to be enough to get your foot in the door. Also, even if you had enough money, you'd be relying entirely on the property market going up, and going up substantially, to be able to move on to bigger and better things.
And I haven't even mentioned the likelihood that the estate agent will spot you - a first time buyer - a mile off, and try to fuck you over.
The last estate agent we dealt with forgot to mention the damp lurking behind the very large furniture that we insisted on having moved before we signed anything - and, ya know, he seemed like such a nice guy*.



*Estate agents are not obligated to tell you all the facts
 
 
Ex
07:46 / 07.02.06
But if I continued renting, couldn't I just save the money that I would otherwise pay my mortgage lender in interest, and, I dunno, break even?

I doubt it, because your landlord will be charging you as much as the mortgage would be, at least. Your rent is never going to be precisely equivalent to [cost of house] divide by [length of time in house].

The only way you'd get a bargain would be if the value of the property has risen, so the landlord has comparatively low mortgage payments but decides to pass the savings on to you; then you'd live in a more expensive house and it would be cheaper than buying it. (Similarly if the landlord owns the property outright and does the same.)

I'll be back with some figures.
 
 
Quantum
08:31 / 07.02.06
What Boboss said. Even renting is becoming untenable.

Is everyone aware of the freehold-leasehold distinction? i.e. you 'buy' your house for 99 years from the owner of the land. So your grandchildren get turfed out 300,000 pounds down the line in theory. In fact, most people sell or the leasehold is renewed or something, but don't think buying a house buys you the land, nuh-uh, it belongs to ancient dynasties of rich landlords.

And, uh NEGATIVE EQUITY ring any bells from the 1980s? You buy your house for 300 grand, house prices fall, you're left with a 60 grand house and a 300 grand debt. A friend of mine spent every summer of his childhood camping because his family had to let their own house, in order to pay off the N.E. which took about twelve years of backbreaking effort. Not much fun.

So, it's not all gravy. Think about giving 10,000 pounds to the bank every year until 2036.
 
 
Smoothly
08:42 / 07.02.06
I don't think banks want to be landlords. So they don't buy houses.

But they wouldn’t have to be landlords, they could just board the things up for a few years and still rake in a massive profit.

The other thing to remember about banks and mortgages: it is a win-win situation for the bank. If you pay your mortgage, they get the overall interest, which they in turn can invest and turn into a larger profit. If you don't pay your mortgage, they get your house. See? Win-win.

Yeah, win-win. And if more profit lies in the resale value than the interest they’re making, the second win is the bigger win. So why don’t they just take that in the first place?

Banks also labour under the "evil empire" syndrome: they have a responsibility to show a decent profit to their shareholders each year, and I don't think that can include the appreciation in value of insecure non-liquid assets (i.e. houses).

Not sure what “evil empire” syndrome is, but passing on the lion’s share of the profit to be made on a house to their debtors, that doesn’t sound very evil to me. And speaking of shareholders, why does anyone with money invest it in shares? Why aren’t they investing in houses?

The up-and-coming area thing actually does hold water, as well. If property values are on the rise in an area, odds are they will continue to rise, and then eventually flatten out - it's a trackable trend

If odds are that they will continue to rise, how come this isn’t reflected in the prices? I assume that something which is sure to increase in price will cost you more than an equivalent thing that is sure to fall in price. Like I say, I don’t know much about economics, but that sounds like common sense.


Boboss, I know what you mean. The reason I rent is that I can’t really afford to do otherwise. At least I could never afford to buy the kind of place that I can afford to rent.

And what you say, Ex, makes sense. But:

Your rent is never going to be precisely equivalent to [cost of house] divide by [length of time in house].

I didn’t think it would be precisely that, but I assumed that rental prices were related to sale prices. But most people I know who have bought to let haven’t been able to charge much more than the cost of the mortgage repayments. And then it’s their problem if the property is ever vacant, needs maintenance or if house prices fall. But if there’s little or no risk of house prices falling (and I can, in fact, expect something like a 1000% return over 20 years) then I don’t know what I’m worrying about. Although I come back round to wondering how the price of housing can go on and on rising in relation to salaries, inflation etc. Just flies in the face of how I thought economies worked.
 
 
Quantum
08:51 / 07.02.06
Your landlord is responsible for maintenance and and repair of course too, insurance, various duties and stamps, replacing the old victorian plumbing, having the roof insulated etc etc. which counts toward the cheapness of rent. I'd buy if I could but in the meantime I'm looking on the bright side.
 
 
Spaniel
09:04 / 07.02.06
I don't know much about economics, either, but I'm pretty sure that if house prices were reliably trackable then many, many people wouldn't have lost so much money over the years.
Take Hastings, for example, are house prices rising sustainably in the area, or are the prices artificially inflated by buyers hoping that the area will provide a good return on their money? It's very hard to judge.

As for why banks don't buy property? I dunno, maybe they're not allowed to.
 
 
ONLY NICE THINGS
10:24 / 07.02.06
But most people I know who have bought to let haven’t been able to charge much more than the cost of the mortgage repayments

That's the market in action. Lots of people thought that buying to let would be a great way to make free money while also moving towards owning property. As a result, the market in London was flooded with rental accommodation, manly at the lower end of the market (because most of the buy-to-let people were themselves at the lower end of the market). As a result of _that_, landlords have been unable to raise rental prices at a level commensurate with rising house prices, because there is a lot of rental property available. This also means that the market is created for people who are renting because they can't afford to buy.

As for banks buying property - well, they do fund property, and lots of it. Much bank money is invested in loans to people or businesses who are buying property with it, and I believe some banks hold property portfolios also. However, bear in mind that the property market is not predictable - we assume it to be on a progressive upward trend, but this is no more certain than the same statement made about the stock market. Therefore, no sensible bank is going to want to overextend in property. Also, money in property is hard to liquidate quickly, so having large amounts of money in property actually harms your ability to capitalise quickly on shifts in the markets - so you in effect lose money because you couldn't get the money out in time to invest it in something more profitable. You don't get that money back until you sell the property, and in the meantime you have to deal with land rents, governments with housing crises penalising you for holding property left derelict, squatters, arson - leaving property boarded up in areas which trend towards unaffordable property prices is, I think, a bit of a complex business.

Finally, you're back to the market. let's say Swindon is a very desirable place to buy property. It has high employment, low crime, good schools and surprisingly low house prices. HSBC steps in and buys up 90% of the property in the area, then sits on it. This flurry of activity pushes up property prices, but there is now nobody to sell to - Swindon has gone from being a desirable place to buy property to a place where house price inflation has made actually buying a house there impossible. So, what does HSBC do? It can sell the houses early and/or at low prices, in which case it has failed to capitalise on its assets. If it doesn't do that, then the employers in Swindon either have to increase wages (so people will come there and be able to buy property still) or move elsewhere. People in Swindon will have less dosposable income, which means that they will not be able to go out. Local amenities will go bust, because everyone is struggling too hard to pay off their mortgages to go out. Local small businesses start defaulting on their HSBC business loans. Small share traders using HSBC share trading services cut back on their exposure to risk. Swindon becomes known as an arid wasteland with no local employers or amenities, and with horribly inflated house prices. The prices at which those homes not owned by HSBC trade start to fall as people try to catch the crest of the wave by selling up and getting to somewhere else where they can get a nice house for less money, so the value of the assets HSBC is holding starts to drop through no action other than them holding them.

That's horribly simplified, and it is based on a very limited understanding of what banks actually do, but I think it's the kind of thing that prevents any one investment being a guaranteed greater money earner than others - as in the case of buy-to-let property in London, investing has an impact on the terms on which the investment functions.
 
 
Smoothly
10:52 / 07.02.06
Cheers Haus.
It’s just that people talk about houses as if they’re a guaranteed money-maker, and as if they don’t have the same risks attached as any other investment. It’s not that I think it’s impossible to turn a profit in that market (as people who have bought and sold in the last 15 years have proved) but people still mock me for renting as if it’s 1997. And they talk about renting as throwing away money as if mortgages are free. On the other hand, if I borrowed half a million quid from a bank in order to buy tech stocks, or gold, or whatever, I think the same people would look at me askance. I know you can’t live in a big block of gold, but I assume the same basic rules apply in terms of how and if it would earn me money.

Isn’t it quite plausible that house prices will go through a period of decline in much the same way that they’ve recently gone through a period of growth (again, weak understanding of economics, over a large period of time these things must ebb and flow towards a mean in relation to salaries, prices etc, no? What goes up, and all that?). And in times when house prices are falling, renters will profit from the losses being made by owners, won’t they. Or more accurately, they remain immune from losses in a Bear market in the same way that they're insulated from gains in a Bull one. If you’re risk averse, renting is the sensible option, isn’t it?
 
 
Spaniel
11:13 / 07.02.06
Well, you'd run the risk of having no valuable assets in your old age (assming you weren't investing elsewhere), and with pensions the way they are, not to mention the cost of care, that could be a problem.
 
 
ONLY NICE THINGS
11:35 / 07.02.06
Except that in a market where house prices are falling, the person who had rented and instead invested the money they needed for the mortgage might actually have a greater cash value than the property.

Smoothly: basically, the difference is that by paying rent you are giving somebody money in exchange for a service rather than an asset - the service of living in a property for a month (and by extension the service of not having to pay insurance, repair fees and so on), whereas the money you pay on a mortgage is effectively like paying for a TV in instalments - you are paying off a loan supporting the purchase of an asset, and have the right to sell it on as you desire. After twenty years of paying a mortgage of £800 a month, you'll have a house - the gamble there being whether the appreciation in the cash value of the house has outstripped the appreciation of the debt due to interest. As mentioned, if the value of the house drops and the interest level does not, you don't make a profit and are instead financially screwed. However, you will still own a house at 60, whereas if at the age of 60 you decide to stop paying rent you will be homeless (unless you have parlayed the moeny you saved by not spending it on a house into a tidy sum, whereupon you can take advantage of the depressed housing market to grab a bargain).

Prevailing wisdom states essentially that in countries with growing demand for housing and finite resources for new housing, house prices will continue to rise as long as other economic factors continue to rise - those factors including inflation, individual purchasing power and the strength of the economy. If house prices outstrip people's ability to purchase, house prices will adjust, either by crashing, settling downwards or level or just increasing slower than inflation. In order to avoid that (in particular in London), banks gamble on offering people larger and larger mortgages, so that buying power is adjusted upwards.

Looking at London, specifically, you can see that the means by which purchasing power is adjusted upwards in line with house prices is reaching the point of total insanity - mortgages of 110% of the value of the property at 6 times your income, anyone? As such, there is a constant hope among those who do not own property that people will stop buying property, thus forcing the market to adjust (this happened within living memory in the upper end of the market, although not to a calamitous extent). However, the factors that would severely damage house prices - deflation, stock market collapses, other macroeconomic factors - would probably be damaging to other investments also - that is, a climate would be created where it would be difficult to stay or get wealthy for many people.

That's my very rough understanding, anyway. Mind you, the other problem with treating the value of your property as an asset is that appreciation is not unique. So, if you buy a house for £250,000 and ten years later it is worth £1 million, that's great for collateral to borrow against (because if a loan agency evicted you and sold your house to cover non-payment of debts it would be worth a million pounds), but not much good if every other house that cost £250,000 ten years ago is also worth £1 million - as your realisable buying power (assuming you need a place like that in which to live) has not actually gone up.
 
 
Brunner
12:09 / 07.02.06
Why don't banks just buy houses instead of granting mortgages? Everything Haus said plus the fact that mortgages are usually secured against the asset - if you default on your mortgage the bank get the house anyway. Banks are very conservative entities and prefer to lend small amounts of money to a large amount of lenders to create steady income and also a "mortgage book", a stream of secured income which itself can be sold on as an investment if need be!

As to why it is best to buy rather than rent...in Britain it is a mind-set thing that ownership is king. This is partly based on the economics of ownership, ie, mortgage payments could be less than rent paid and at the end of the mortgage you have an asset (whereas renting results in fuck all). The government has encouraged ownership through such policies as mortgage interest tax relief (now abolished) and right to buy Council housing at a discount (in order to reduce the state's council house burden). A mortgage is also the cheapest way to borrow money. Try borrowing £300K to buy gold. You won't get it for sub-6% will you? And would you really invest the savings you make on paying interest while renting. If your rent is less than a mortgage, where will you invest the difference? What are you left with if the company goes bust and your shares are worthless? Property (at least owning your own home) satisfies a need (somewhere to live) and generally, appreciates in value.
 
 
Axolotl
12:14 / 07.02.06
As a small aside Lloyd-George back before he was PM proposed a 100% tax rate on all rental income.
There was a thread on land ownership and right to roam which recommended "This Land is our Land" by Marion Shoard which dealt in detail with this and the reasons behind it. It always struck me as a bizarre idea, but it had a certain appeal.
 
 
Smoothly
13:00 / 07.02.06
After twenty years of paying a mortgage of £800 a month, you'll have a house - the gamble there being whether the appreciation in the cash value of the house has outstripped the appreciation of the debt due to interest. As mentioned, if the value of the house drops and the interest level does not, you don't make a profit and are instead financially screwed. However, you will still own a house at 60, whereas if at the age of 60 you decide to stop paying rent you will be homeless (unless you have parlayed the moeny you saved by not spending it on a house into a tidy sum, whereupon you can take advantage of the depressed housing market to grab a bargain).

This is what was concerning me. There are all kinds of reasons, other than financial ones, that I’d like to own a house (in particular, the freedom to spend money making it nicer and potentially recouping that expenditure, whilst making the place my own). What worries me is that since I don’t have half a mill knocking around, I would have to borrow this at a cost. Even something like 4% over 25 years stacks up to a hefty additional expense on the purchase, and I just wondered how that would compare with the money I am ‘throwing away’ in rent. If I saved the money (in bonds or something very low risk) that I would otherwise have to give away in interest, would I, after 25 years or so of renting, then be able to use it to buy a place outright. In other words, could it make sense to spend that interest on rent (particularly at the moment when sale prices are high and rental supply is outstripping demand).

And my instincts have been telling me that I should probably not anticipate too much in the way of increased value on the investment due to a rising market because (a) the value of your house can go up as well as down, and (b) like you say, if all property goes up at the same rate and I have to buy another house the moment I sell mine, that increase is cancelled out. That’s why Xoc’s point that my house will probably be worth 10 times what I paid for it when the mortgage is paid off seems kinda illusory.

I’m also interested in what Brunner says about the culture of house buying. As I understand it, a lifetime of renting is relatively common in other (non-UK) European countries, and elsewhere.
 
 
Loomis
13:24 / 07.02.06
A significant part of the culture of house buying no doubt depends on how a society houses its retirees. I imagine in Europe there's more of a tradition of living with your children when you retire, so as long as someone is working and paying the rent then you don't need to buy.

Furthermore, the tradition of extended families sharing a house throughout their lives, retired or not, helps to avoid the housing crisis created in Britain partly because of so many households with only one or two inhabitants.
 
 
Scrambled Password Bogus Email
13:29 / 07.02.06
Old thread
 
 
Quantum
13:45 / 07.02.06
Mortgage payments tend to be cheaper than rent on a month-month comparison too, if you have more disposable income each month from buying instead of renting it might feel like a good idea.
I think the main attraction for people is that one day you won't have to pay every month for a place to live.
 
 
Brunner
13:51 / 07.02.06
In Britain, no landlord will grant more than a short assured tenancy on a home. Meaning you take it on an agreed term of say 1 year which renews annually. They always have the right to kick you out with a certain amount of notice, usually 6 months. You therefore have secure tenure for 6 months once the initial 1 year is up. I believe that in other countries, landlords will grant much longer tenancies thereby guaranteeing security of tenure for a much longer period. This makes renting more attractive as the rent may not be reviewed (upwards) for a number of years or until a new lease is required. Generally in Britain, if you want a long lease, typically 99 years, you have to pay a premium (in lieu of future rent) which is generally equivalent to the freehold value anyway!
 
 
Smoothly
13:57 / 07.02.06
Quantum, I do find that puzzling. Is that just rent vs. mortgage repayments or rent vs. mortgage plus other expenses of ownership over a number of years? It just seems contrary to the principles of market forces that you can have two options:
(a) Pay a monthly fee for occupation
Or
(b) Pay a monthly fee for occupation and then receive full ownership of the property after 20 years.

And that (b) would be cheaper.
 
 
Loomis
14:28 / 07.02.06
It would surely be a rare location if you could afford to buy a place for the same monthly repayment that you currently pay in rent. That's often the real bite of stepping up from renting to owning: swapping your centrally located stylish pad and a short trip to work for a newbuild out in the sticks and an hour long commute.
 
 
Brunner
15:38 / 07.02.06
(b) might not be cheaper on a month by month basis, but, after paying your rent, do you think the savings made between rent and what you might have paid on a mortgage can be invested to grow to the value of the house over the same term? Assuming safe investments such as say gilts, I suspect not. Stocks and shares, possibly, but the risk is somewhat higher.
 
 
Smoothly
15:52 / 07.02.06
That’s something that I’d like to know, even roughly.

Say I took out a £500,000 mortgage to be repaid over 25 years on a standard interest rate. What would my monthly repayments be? How much interest would I pay, in total, over the course of the loan?
 
 
Quantum
16:33 / 07.02.06
Say I took out a £500,000 mortgage to be repaid over 25 years on a standard interest rate. What would my monthly repayments be? How much interest would I pay, in total, over the course of the loan?

Mortgage calculator

If your standard interest rate is 6% you'd pay 3,259.44 of which 2500 would be interest (which of course would reduce as the outstanding debt were reduced by 760 quid a month). Don't be deceived by compound interest, it's tricky. (he said patronisingly)

I can't find the pound symbol #$%"}?!` ~ ` grr.
 
 
grant
16:51 / 07.02.06
How often *do* housing prices decline? I was under the impression this almost never happened -- the worst that *generally* happened was that they wouldn't rise to keep up with cost-of-living increases/inflation and the rest.
 
 
Quantum
17:03 / 07.02.06
...but check this out, 120k @ 6% over 25 years= 782 quid a month, 600 pounds of which is interest (intially).

Here's some information from the govt. about mortgage interest rates, comparing fixed and variable rate mortgages. Also see this Those who understand compound interest are destined to collect it. Those who don't are doomed to pay it. nice site!

Here's a compound interest calculator but it's more for savings
 
 
modern maenad
17:04 / 07.02.06
Mortgage payments tend to be cheaper than rent on a month-month comparison too, if you have more disposable income each month from buying instead of renting it might feel like a good idea

I'd say this depends very much on where you live. In Leeds, where we had our first house, our mortgage was just under £400 a month, and next door paid £550 rent - so we were definitely coming out on top (and if I remember rightly about half of that was interest, other half slowly chipped away at reducing out total loan). Here in Over Inflated Property Prices Oxford, our mortgage is same as neighbours rent, but that's because we don't have a 100% mortgage. Rent for house on our street is about £850 a month, whereas a mortgage on 100% loan would be double that. Just like Loomis said.

And re: house price decline, they can and do for brief periods but general trend is onwards and upwards, and reckon they will continue to as social trends continue towards one and two people occupancy and banks/lenders adapt to market and devise more complex mortgage products such as second and third generation mortgages and part loan/part rent arrangements. Also, and this may be a bit crude, but legislation protecting green belt will (I hope) continue to restrict expansion of new builds into countryside, leaving brown sites and replacement of existing housing. But I may be talking out my bottom on this one.
 
  

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